In June 2014, I made a wager with a friend (here is the full story) when the price of oil was slightly above 100 USD.
Let’s restate the full wager again here for the sake of clarity.
I said that before March 31st, 2016, WTI would have been below USD 28.- for a minimum of 5 days (non-consecutive) or more. March 31st is just behind us and we have – drums rolling …..
4 days below USD 28.- Yes , that’s right – I have lost my wager and I have to admit that. I was shy of a full day and there is no denying that.
Let’s take a look at the journey. From since I made the wager (which was a little more than 21 months ago) WTI had sunk from USD 104 to just above USD 26.- That’s a whopping journey and it has reshaped the planet already now. However, if you believe that this was it – hold your breath buster as there is much more in the oven than you would care to see.
Much more important is the question how I could come so incredibly close to the truth. I have beat virtually all the experts out there including all the big banks and oil consulting firms with their millions of USD in oil price simulation tools and databases counting everything from drill bits to paperclips?
Let’s come clean on one thing right now. I cannot predict the truth. As Yogi Berra once famously said – “Predicting is hard – especially so with the future”. I would like to push that a little further. Predicting the future is utterly impossible. The proof – my own wager. Did I want to lose my wager? -Remember that no matter how close I have come – I am still one day shy from the ultimate truth. Moreover, WTI did not drop from USD 104 to 28 as I have predicted but almost to 26.
Had I known the truth, I would sure have said so and not have just come closer than anyone else.
The real problem is that most energy business (and indeed most big business) is based on business plans that all are rooted in prediction of the wrong kind. When you write your business plan, you will have to show a way to profitability, which means that you need to show revenues, cost stacks and a whole plethora of numbers that show that you have drilled the issues to the very end. You will present a view of the future as you see it, which means that you are predicting. However, we have just seen that accurate prediction is absolutely impossible.
A sailors saying goes “You cannot predict the direction of the wind but you can get better at setting sails”.
Here we expose the kernel of truth in this whole prediction business. Way to many forecasters have become numbers pushers and try predicting wind directions when they completely forget the “sail setting “workout. I remember when I was Middle Manager in a gas trading company where I tried to create awareness for this need to get fitter as traders rather than try to guess the numbers right. I was on a lost mission as I was talking to a wall – no effect at all. Everyone listened to the Quants – those who ran numbers simulations to no end in order to predict trends and indices and …
They all were wrong as not one single Quant predicted the situation we are in today when it really mattered. Anyone still remembers the forecasts with USD 80 as a low price scenario? That’s all rubble now but every single Quant on the planet had bet his balls on those scenarios just two years ago. One look at the situation for European energy companies suffices to know that a dose of “Sail setting” training would have done all of them good.
In EconGas we had an oil price wager – everyone was invited to put in his guess for where Brent is going to be the following Thursday and whoever came closest won the pot. Surprisingly it was the assistants and secretaries that came closest most of the time. It was those who did not work on energy but rather ran errands for the so called experts that came closest to reality. Maybe because they were not so extremely lopsided and enamoured with their own bias which allowed them to look farther. Maybe it was sheer luck. We won’t know but what we know is that all those expensive gimmicks are useless if we cannot use our gut to sense where the truth is going to be.
But using our gut requires guts as sometimes you will be wrong and that’s just the way it is. It’s not safe but it’s the best you have.